Ivy League’s wealth grates the Congress

Sunday

Sep 30, 2007 at 6:00 AM

By Alison Fitzgerald BLOOMBERG NEWS

Rising tuition costs and growing endowments at Harvard, Yale and other universities are drawing the ire of lawmakers who question whether the nonprofit institutions continue to deserve the tax exemptions they receive.

The Senate Finance Committee met Wednesday to examine whether lawmakers should tie the endowments’ tax-exempt status to lower tuition. Lower costs at elite schools would probably have a cascade effect that would bring down fees at all colleges and universities, experts told the committee.

“Since tax breaks for charitable donations are supposed to contribute to the public good, it’s fair to ask whether the tax breaks that lead to big university endowments are serving the public,” said Sen. Charles E. Grassley, R-Iowa.

The value of university endowments last year increased 17.7 percent to more than $340 billion, according to the Center for College Affordability and Productivity, a Washington research group. Tuition, meanwhile, rose an inflation-adjusted 35 percent since the 2001-2002 school year, according to the College Board, a New York-based nonprofit group that administers the SAT college admissions test.

Harvard University, in Cambridge, Mass.; Yale University, in New Haven, Conn., and some other institutions with multibillion dollar endowments could eliminate undergraduate tuition altogether if they spent 1 percent of that money on financial aid, said Lynne Munson of the Center for College Affordability. Overall, schools are spending about 4.2 percent of their endowments, an all-time low, to help cover such costs as salaries, scholarships and capital improvements, she said.

Harvard spent $90 million and Yale spent $60 million on grants to undergraduates in the 2006-2007 academic year, according to the schools.

Grassley, the ranking Republican on the Finance Committee, said he was shocked when Grinnell College, a school with 1,500 students in Grinnell, Iowa, raised its tuition 12.6 percent for this year to $34,000, saying it needed to bring its tuition into line with its competitors. “This tuition increase comes from a college that has an endowment of more than $1 billion,” Grassley said.

He said the head of the school seemed to be acting more like the chief executive of a for-profit company. Grinnell officials didn’t immediately respond to a request for comment.

“Why are we allowing these endowments to be tax-free?” said Sen. Jim Bunning, a Kentucky Republican, after hearing how large many endowments had become.

Jane Gravelle, an economist at the Congressional Research Service, the nonpartisan research arm of Congress, said lawmakers could collect taxes from endowments by restricting their use of offshore investments, or they could require colleges to spend more of their endowment income.

“Endowments are currently earning high returns, with most of those returns being used to increase the endowment, rather than being spent,” she said.

Harvard has the largest endowment, with $34.9 billion as of June 30. Yale had $18 billion on the same date, followed by Stanford, near Palo Alto, Calif., with $15.2 billion. The University of Texas had $13.2 billion and Princeton had $13 billion.

On average, about 18 percent of U.S. university endowment money was invested in hedge funds as of June 30, 2006, according to separate surveys by the Commonfund Institute and the National Association of College and University Business Officers, based in Washington.

Much of that money is invested offshore. Universities, pension funds and foundations don’t owe tax on most investment proceeds, though they are required to pay “unrelated business income tax” when they receive profits from debt-financed investing. Hedge funds currently set up so-called blocker companies in offshore tax havens that convert such profit into dividends, which aren’t taxed.

The blocker company technique has been approved in individual cases by Internal Revenue Service rulings. It makes it easier for tax-exempt organizations to take bigger risks, and reap bigger returns, without incurring tax penalties.

“I am concerned that tax-exempt organizations are so easily able to plan around those rules with offshore structures,” Grassley said. “This committee should examine the underlying policy.”

Earlier this month, Rep. Sander M. Levin, D-Michigan, offered a measure allowing universities to invest in hedge funds in the U.S. without incurring a tax penalty.